Stability and Transitions in Emerging Market Policy Rules

Published By: IGIDR on eSS | Published Date: February, 01 , 2015

Conditions for stability in an open economy dynamic stochastic general equilibrium model adapted to a dualistic labor market (SOEME) are the same as for a mature economy. But the introduction of monetary policy transmission lags makes it deviate from the Taylor Principle. Under rational expectation a policy rule is unstable, but under adaptive expectations traditional stabilization gives a determinate path, with weights on the objective of less than unity. Estimation of a Taylor rule for India and optimization in the SOEME model itself, all confirm the low weights. The results imply that under rational expectations optimization is better than following a rule. If backward looking-behaviour dominates, however, a policy rule can prevent overshooting and instability. Economy-specific rigidities must inform policy design, and the appropriate design will change as the economy develops.

Author(s): Ashima Goyal | Posted on: Mar 11, 2015 | Views() | Download (409)


Member comments

Submit

No Comments yet! Be first one to initiate it!

For permission to reproduce this paper in any way, please contact the parent institution.
Creative Commons License